Vienna calling — An assessment of the Austrian housing market

7 min readSep 23, 2019

*Disclaimer: this article only represents the personal opinion of the writer and should not be treated as financial advice.

The Austrian capital of Vienna is one of the most liveable cities in the world[1]. With its excellent public transport network, rich culture and relatively low cost of living, the city’s continuous growth doesn’t come as a surprise. By 2033 Vienna is expected to be the home of more than 2 million inhabitants.[2]

But more people means higher housing and rent prices. This is reflected by the development of the Austrian residential property price index [3] from the Austrian National Bank.

As shown in the graph, the Austrian property market has been increasing ever since the dip in 2004, with Vienna showing the most significant increase. The upward trend has continued for more than 15 years. This makes many people looking into moving to Austria’s capital wonder if prices are bound to increase further in the coming years.

Taking the city’s future growth of inhabitants into account, local real estate developers are very confident about the market’s potential. Prices are expected to continue their climb in the whole of Austria, but especially in Vienna [4]. One reason for this is a raised interest in Austrian properties by foreign buyers [5]. Vienna, in particular, offers the most opportunities for young job seekers which will continue to move to the capital [6].

Income, Debt & Property

When we are valuing property, there are several factors to take into consideration:

1. House price-to-income ratio: Measures how many years average people have to work in order to afford a house

2. House price-to-rent ratio: Measures how many years’ rent one has to pay in order to buy the property. Combined with the ratio above, it is easily deductible, whether it’s more economical to buy or rent a property

3. Real property price: Property price adjusted for inflation

4. Credit taken out by household as a percentage of GDP

Bloomberg [7] has combined house price-to-income and house price-to-rent indexes and made the following visualization:

As we can see, there is still some distance between Austria and the top 5 countries with the most over-valued property prices. Ranked as high as the 12th, the Austrian property market seems to still have quite some growth left before reaching bubble territory. But whether housing prices are affordable for a majority of people also depends on other factors like household debt and disposable income.

Here is a graph of household debt as a percentage of total net disposable income in 2018 by OECD [8] with the top 5 most overvalued countries from the graph above and Austria highlighted:

The debt level for the average household in Austria is not as high as in other countries. This means that the average Austrian citizen does have some disposable income left after paying his or her debt.

Next, let’s look at the nominal and real net income (income adjusted for inflation) in Austria (source WKO [9]):

Taking 2000 as the base 100, over the past 18 years, nominal income has increased to 145, however real income only managed to climb to 104. If we compare this graph with the Property Price Index graph at the beginning of this article, we can see property prices have more than doubled, while people’s income has not increased accordingly.

Inflation on the way

There are other factors which we also need to take into consideration when analyzing the Austrian housing market. On 12th September 2019, the European Central Bank announced new interest rates and monetary policy measures: “The interest rate on the deposit facility will be decreased by 10 basis points to -0.50%. The interest rate on the main refinancing operations and the rate on the marginal lending facility will remain unchanged at their current levels of 0.00% and 0.25% respectively.” [10]

Here is a table of interest rate in percentages per annum [11]:

The interest rate for deposit has been negative since June 2014 and has been decreasing ever since. The small percentage is reflected in banks charging a higher fee for deposit accounts. That means people do earn little interest on their savings. But what is worse, savers money is becoming less and less as time passes ever since 2014. Another problem for potential property buyers: Their savings are diminishing at an increasingly faster rate. In August 2019, the annual inflation rate was 1.5% [12]. We know that real interest rate = nominal interest rate minus inflation. Assuming inflation stays the same throughout the year, the real interest rate would be -2%. For every 10 000 Euros people save in the bank, the amount is reduced by 200 Euros every year.

Low interest rates and inflation already pose a serious problem for savers. But things are looking to get worse since the ECB plans to introduce quantitative easing: “Net purchases will be restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.” [13]

Translate into simple language: The ECB is going to inject €20 billion into the market to buy bonds every month starting November and for as long as they feel that it’s necessary. This cheap money is supposed to stimulate the economy and encourage people to spend more.

Will it work though?

Crisis on the horizon

As we all know, the economic cycle has its ups and downs. Supported by lower and lower interest rates and quantitative easing the global economy has fared pretty OK over the last 10 years. But taking the Kondratieff wave [14] as an example, another economic downturn is probably overdue — with or without new money being injected into the system by central banks.

How will all of this affect the property prices?

Here is what a possible scenario could look like: As the next recession eventually sets in, many companies will go bankrupt or they simply cannot make enough profit to keep their business running at the current state. As a result, unemployment will soar. As people lose their income, we expect there will be more defaults on bank mortgages which will lead property prices to decrease. However, central banks will introduce lower interest rates and more quantitative easing to help the economy keep running. With even more money in the market, prices are bound to increase thus causing inflation. Normally properties prices go up as inflation increases, they are a good investment to help investors hedging against inflation. But as we have seen, the income of people in the last 18 years has not increased much plus there could be more unemployment, this will deter potential buyers from buying properties, this means not enough demand to support the property prices, thus high property prices will not sustain and will eventually fall.

Conclusion and outlook

It is difficult to predict how much more and for how long the Austrian property prices will go up. But what potential buyers and sellers can be sure of is that the increase in prices will eventually slow down and the bubble will deflate. For Austria’s property market this will be a first-time experience. But examples from all around the world — like Canada in 1990 — give us a good idea, how things will likely unfold. Chances are, though, that when the bubble bursts it won’t just happen in Austria. After years of very strong growth, the property markets in numerous countries around the world face uncertain times as house prices from Australia to the United States stagnate or fall.

A follow-up article has been published: Is it better to rent or to buy real estate in Austria?

Reference:

[1] https://mobilityexchange.mercer.com/Insights/quality-of-living-rankings

[2] https://www.wien.gv.at/statistik/wien-wachstum.html

[3] https://www.oenb.at/isaweb/chart.do

[4] https://www.immoflash.at/20190916/ezb-befluegelt-die-immobilienbranche/13826/?ac=0

[5] https://www.austria.org/population

[6] https://www.immoflash.at/20190918/chinas-investoren-entdecken-wien/13864/?ac=0

[7] https://twitter.com/FinMktsEnglish/status/1156407989210951682?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1156407989210951682&ref_url=https%3A%2F%2Fwww.blogto.com%2Freal-estate-toronto%2F2019%2F07%2Ftoronto-housing-prices-could-fall%2F

[8] https://data.oecd.org/hha/household-debt.htm#indicator-chart

[9] https://wko.at/statistik/prognose/outlook.pdf

[10] https://www.ecb.europa.eu/press/pr/date/2019/html/ecb.mp190912~08de50b4d2.en.html